Commercial property auction warning
Investors have been warned about buying commercial property at auction
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Wednesday, 12, Apr 2006 05:13
Experts are warning private investors that they must be careful when bidding for commercial property.
Last year some £2 billion worth of commercial property was auctioned off in the UK as investors rushed to the sector.
But while the market is booming, investors are being urged not to dive in at auctions.
"Private investors need to make sure they don't get their fingers burned at these auctions," said Peter Flemming, head of property at law firm Betesh Fox.
"Few people who make a success of this are rookies. Most investors have large portfolios where they can spread the risk," he explained.
And in the heat of the auction house mistakes can easily be made that are not easily rectified.
"Smaller investors must be aware that acceptance of a bid creates a legally binding contract and they must pay a ten per cent deposit," Mr Flemming said.
"Doing your homework by inspecting the seller's legal pack prior to the auction is crucial if you don't want to end up in trouble. Property is usually 'sold as seen' which means a buyer will inherit any problems it may have.
"Buyers are also asked to pay the balance of the purchase price within a month so funding must be available."
And there are some specific aspects of the market that new investors might not be aware of.
"With commercial property, it is important to calculate the length of time left on the lease and work out what sort of return you will get," Mr Flemming added.
"If a tenant quickly vacates the premises it could prove hard to find another tenant.
"If a tenant goes bust you may also have problems. Developers with years of experience often face these pitfalls and it's not for the faint hearted. Getting professional advice is vital."
But the situation is not lost, and there are still good reasons for investing in commercial property.
Clive Gawthorpe, from accountancy firm UHY Hacker Young, explained: "Tax breaks are available for commercial property owners in certain areas and it is worth knowing where savings can be made.
"For example, capital allowances are the main difference and property buyers quite often forget these when purchasing.
"The vehicle used to buy the property, whether through an individual, a partnership, limited liability partnership or a limited company also has tax consequences," he added.
But it is important to get this aspect right, as mistakes with tax liabilities can be costly, he concluded.